And Justice For All…or how Metallica provide the key to progressive economic theory

Simon Zagorski-Thomas

February 2, 2011

In a nutshell…

The notion of fairness has become a buzzword in contemporary British politics and this, combined with the oft-stated vacuum left in politics since the collapse of socialism / communism as an ideological force, provides the basis for this piece. I suggest that the simple theoretical basis for a progressive opposition to free-market capitalism should be the idea of ‘true’ economic costs. The social impact of economic activity (pollution, public health, traffic congestion, violence etc) should be reflected in the cost of that activity and therefore the price that consumers pay for it. The very simple ideological stance that lies behind this proposition is that it is unfair for someone to profit from activity that harms the rest of society.

What’s wrong with economics?

With a title like that you can see, perhaps, why I got a rather lack lustre 2:2 in Economics (the People’s Degree as I prefer to call it). Throughout my undergraduate degree I continually and ineffectually tried to make the point that economics was based on the most ludicrous assumptions about human behaviour and motivation: that humans use the money available to them in a logical, informed and consistent way to maximise their material satisfaction. This is the utility theory of Jeremy Bentham and John Stuart Mill that forms the basis of modern economics. Obviously I’m not alone in my views in this regard, as Yanis Varoufakis, professor of political economics at Athens University, pointed out on his blog: “For some, science is as good as its predictions. On that account, seismology and economics are comparable failures. Neither has ever managed usefully to predict a major ‘event’.”

If the assumptions of utility theory are correct then the obvious objective of economic and political behaviour should be to maximise economic growth, the activity that will provide the maximum amount of money so that people can maximise their material satisfaction. That strategy of maximising human happiness through global capitalism might, however, be perceived to be falling slightly short of this utopian ideal – and that’s where the complexities really start.

The theories about why the free market system isn’t delivering on its promises are many and varied. When I was taught economics, one of the crucial arguments centred on the idea of perfect competition. As far as I can see, the essence of the perfect competition issue is that free markets would function as they are meant to if people weren’t people and the world wasn’t the world. As there isn’t a perfect and costless flow of information between people of equal intellectual ability in a market where capital can flow instantly and costlessly between these participants, then there has to be some inequality and some regulation: the bigger the imperfections in the market, the bigger the inequalities and fluctuations. I think we can look around in the world and assume that competition is pretty imperfect.

At this point I’d like to go back to the idea of economic growth and examine how much sense it makes to use economic growth as a measure of either our happiness or the government’s success. Can there be such a thing as growth that’s bad for society or an economic contraction that’s good for society? Let’s consider an example. If everyone in the country who didn’t have loft insulation was to put it in they would save money on their electrical bills and those savings would pay for the cost of the insulation and then continue to save those individuals money. The amount of money being spent (on electricity) would have been reduced – negative growth – and yet everyone would be just as warm. Of course, the income to the electrical company would have gone down and so their shareholders would suffer a reduced income too. There’s a whole load of theory that involves terms like indifference curves and marginal utility that I’m going to skip over but which states the bleeding obvious in theoretical language: the satisfaction (or utility) that a poor pensioner gains from saving £10 on their electricity bill is greater than the loss of satisfaction that a wealthy shareholder experiences from losing £10 from their share dividend. So this would suggest that this bit of negative growth created more satisfaction than it destroyed: that society was better off after an economic contraction.

With that in mind, I want to explore the idea of good growth and bad growth. Forgetting about the niceties of economic theory for the moment, can’t we also agree that growth from an increased arms trade or the increased sale of the crappy plastic toys that encourage perpetual drip feed consumption in kids is ‘worse’ than growth that stems from renewable energy companies or pollution reducing technologies? Economics doesn’t think so.

Why hasn’t anyone fixed it?

Why then, is economics so useless? In physics, we (well OK they) built the Large Hadron Collider and are developing new fundamental theoretical principles because of tiny discrepancies in the measurements of subatomic particles. Their theoretical principles were seen to be inadequate and something had to be done about it – but economics doesn’t seem to care about the cracks in its façade. The ideas of utility, satisfaction and demand have been known to be flawed since economics began and yet economists don’t scratch around examining their first principles.

The problem is that the majority of economic theory is a lobbying instrument for free market capitalism. The flawed assumptions that underpin it create the appearance that current economic activity flows ‘naturally’ from the human condition and that there is a scientific basis to free market capitalism rather than an ideological one. But I don’t want to anthromorphise capitalism. It does not have a ‘will’. There is no conspiracy. There is just a status quo whereby economics courses produce people who understand capitalism and capitalism provides them with employment. More importantly, the more you understand it, the more it rewards you and therefore the less inclined you would be to undermine it.

A digression on the unfairness of contemporary politics…

In 1918 the Labour Party adopted, as the fourth clause in its constitution, a commitment to the common ownership of the means of production, distribution and exchange. In 1995 they removed that commitment, despite, for the first time, including the label socialist in the replacement clause. Everybody recognised that this was a radical change. Despite the socialist label, it reflected the general European move at the time that involved the abandonment of the only widespread economic theory that presented an alternative to free market capitalism. The long decline and subsequent collapse of communism in the Eastern Bloc was the slightly earlier and more dramatic manifestation of this move.

In Britain now the mantra of politicians from all parties is ‘choice’. Ironically, the triumph of the market economy over communism has led to a gradual reduction in the range of choice to political consumers: all of our current political parties support the free market system of economic activity. Even in the face of the catastrophic failure of that system we recently witnessed, the political parties concentrate on arguments about how to get things back to the way they were before.

The liberal left (for want of a better description) of society should be looking for an intellectual basis to an economics of fairness, justice and social responsibility. An ideology needs a theoretical basis and that basis should be: how can we measure economic activity in terms of the social ‘goodness’ of its results and penalise irresponsible and socially costly behaviour? These aren’t new ideas particularly and books such as E.F. Schumacher’s Small Is Beautiful (1973) have been arguing for a long time that alternatives to free market capitalism need to be based on an alternative economic theory. An ideology of fairness and social responsibility – and we do need a mainstream political party that is based on such an ideology – can’t be based on an economics of greed.

Charging for true economic costs…

So what would this economic theory look like? There are already theoretical tools that can be used: cost benefit analysis for example. This is the process by which the social costs and benefits of a project such as the building of a new airport are translated into monetary value and used to assess its worth. We might, for example, use the amount by which residential property prices are lower near an airport as a measure of the social cost; or the increased healthcare costs or carbon trading pricing as a measure of the cost of extra air and noise pollution. Of course these are generalised and inaccurate but so are the pricing mechanisms in the rest of the economy. The point is that there’s a need to develop appropriate theoretical tools and, once the principle is accepted the practice will follow.

Perhaps the form this would take would be a variable purchase tax that was applied to all economic transactions at different rates. To some extent we do it already for cigarettes and cars – smokers are, in effect, taxed through duty for the increased health care costs and air pollution (although petrol duty doesn’t get spent on making pollution better – maybe we should be planting new forests with that money to produce oxygen). If the social costs of banking transactions were reflected in share prices and interest rates then it wouldn’t be possible to make large profits from sub prime mortgages, the arms trade or lending to corrupt regimes.

The reason that I’m suggesting this should be realised through the price mechanism rather than through taxes on businesses is because we are not a closed economy. Any company that wanted to trade in the UK (or EU if the idea were to spread) would have their goods or services priced to include the social costs, the true economic costs of their production. UK or EU companies trading abroad could compete freely in market economies without this price mechanism.

Rewards for true economic benefits…

The flip side of this is that the pricing mechanism could also provide rebates to producers who create social benefits. Healthy foods would be cheaper than unhealthy foods. Public transport would be cheaper than car usage. Products that generate less pollution would be cheaper than those that produce more. And, as per my last post, businesses would pay some of the costs of the research that produces the knowledge they use to make profits.

Is that it?

Of course, a suggestion like this raises as many questions as it answers. There are costs of implementing any such system. The more complex, and therefore accurate and equitable, the calculation process involved in establishing these costs, the more expensive it will be. If we make materials used in the production process subject to this price mechanism as well then surely British (or EU) manufacturers will be priced out of the export market. Who decides what social goods are? There’s a whole new political discussion to be had.

This isn’t designed to be an economic system that solves all the fairness issues of the capitalist system at no extra cost. It’s a system that offers an alternative by trading fairness and social responsibility for overall economic growth. The market economy is making the UK more unequal all the time and that is creating greater social division, more crime and a more selfish, hedonistic and less informed population. The price of making the economic system more fair and socially responsible and thereby curing those ills rests in the realisation that monetary wealth is only one factor in the creation of “utility” or satisfaction.

It seems essential to me that any political party that seeks to promote responsibilities to balance rights, fairness to balance enterprise and social good to balance individual gain, must develop a theoretical basis for its economic system that is not based purely on financial greed. Metallica may not have had the reform of market capitalism in mind when they produced their 1988 album entitled And Justice For All but it does provide a suitable slogan.